Almost every foreign company that builds a team in India does it in the same order. Hire people first, pay them as contractors, incorporate later. It works, right up to the week the entity is registered — and then a set of obligations switches on that nobody scheduled.
When a foreign company incorporates in India and converts contractors to employees, three things happen at once: payroll obligations begin from the first day of employment, not the first month of profit; the earlier contractor period does not disappear and remains open to reassessment; and the compliance calendar starts running whether or not the company has revenue.
Converting an India team from contracts to payroll? WhatsApp us with your headcount and start dates and we will map what applies from which date.
Quick Summary — What Switches On and When
| Obligation | Trigger | From when |
| TDS on salary (Section 192) | First salary paid | First payroll month |
| EPF | Establishment reaches 20 employees | Month the threshold is crossed |
| ESIC | Establishment reaches 10 employees | Month the threshold is crossed |
| Professional Tax | State where employees work | Per state rules |
| Shops and Establishments registration | Office or workplace exists | Before or at first employment |
| ROC filings | Incorporation | First financial year, revenue or not |
| Statutory audit | Incorporation | First financial year, revenue or not |
💡 TaxKitab Tip The most expensive assumption at this stage is that the contractor months are behind you. They are not. Indian authorities assess the substance of a working relationship, not the label on the invoice. Twenty people working fixed hours, reporting into your managers, working exclusively for you, and paid monthly look like employees regardless of what the contract says. If that period is later reassessed, EPF, ESIC and salary TDS can be applied backwards with interest. Before you convert, decide with your advisor how you are treating the earlier months — as a genuine professional engagement or as employment that needs regularising. Making that decision deliberately is far cheaper than having it made for you. — From our TDS & TCS Book 6. Available at taxkitab.com/books (Rs 249)
The Contractor Period Does Not Close Itself
Paying an India team under Section 194J at 10% is a legitimate arrangement for genuine professional services. It stops being safe when the working relationship looks like employment in every respect except the paperwork.
The tests Indian authorities apply are practical. Does the person work fixed hours? Do they report to your managers? Do they work exclusively for you? Do they use your systems and follow your processes? Are they paid a fixed amount monthly rather than against deliverables? The more of these that are true, the weaker the contractor characterisation becomes.
This matters at incorporation specifically, because converting the same people to employees is itself a signal. It confirms that the work was ongoing and integrated. Have the position on the earlier months settled before the conversion, not after.
What Begins on Day One of Employment
Foreign parents frequently assume payroll obligations scale with size or start once the business is profitable. They do not.
TDS on salary applies from the first payslip, at the employee’s applicable slab, deposited by the 7th of the following month. There is no threshold below which it can be skipped.
EPF applies once the establishment has 20 or more employees — 12% from the employee and 12% from the employer, on wages up to the ₹15,000 ceiling. If you are converting twenty contractors, you cross that threshold on day one.
ESIC applies at 10 or more employees, covering those earning gross wages up to ₹21,000 a month, at 0.75% from the employee and 3.25% from the employer.
Professional Tax is a state levy, so what applies depends on where your people actually work. A distributed India team can create obligations in more than one state.
The Salary Structure Problem Nobody Sees Coming
This is where imported thinking costs real money. Under the Code on Social Security, 2020, basic pay must be at least 50% of total remuneration. If it is not, the wage base for EPF and ESIC is recalculated upward.
Foreign parents typically bring a home-country salary structure that is light on basic pay and heavy on allowances, because that is efficient in their own jurisdiction. In India, that same structure quietly increases your statutory contributions the moment it is assessed.
Design the structure for Indian law before the first payslip is issued. Restructuring afterwards is possible but awkward, because employees see the change and read it as a cut.
Compliance Starts Even With Zero Revenue
An Indian private limited company files annual returns with the Registrar of Companies, holds board meetings, maintains statutory registers and undergoes a statutory audit — in its first financial year, regardless of turnover.
This surprises parents from jurisdictions with small-company audit exemptions. India has none. Every company incorporated under the Companies Act is audited, whether it turned over ten crore or nothing at all.
Directors have their own obligations too. Every director needs a Director Identification Number and files an annual KYC. A director based outside India needs a Digital Signature Certificate to sign filings, and obtaining one for a non-resident takes longer than most incorporation timelines allow — identity documents from the home country, sometimes notarised or apostilled. Start that process before you need it.
The Sequencing That Usually Works
Fix the position on the contractor months first, with advice. Then design the salary structure for Indian law. Then register as an employer — EPFO, ESIC, Professional Tax, Shops and Establishments — before the first payroll rather than after it. Then run the first payroll, with TDS deducted from the first payslip. Then set up the annual compliance calendar, including audit, from the date of incorporation.
Reversing this order is what creates the backlog most new India entities carry into their second year.
Frequently Asked Questions
Can we keep some people on contracts after incorporating? Yes, where the engagement is genuinely professional and independent — defined deliverables, their own working methods, other clients. What does not work is keeping the same integrated, full-time relationship and calling it a contract because it is administratively easier.
We have paid contractors for eight months. Should we regularise that period? That depends on how the engagement actually operated, and it is a decision to take with advice rather than a default. What you should not do is convert everyone to payroll without having formed a view on the earlier months.
Does EPF apply if we only have twelve employees? EPF applies at 20 or more. ESIC applies at 10 or more. A twelve-person team triggers ESIC but not EPF, until headcount grows.
Our India entity has no revenue yet. Do we still file? Yes. ROC filings, statutory audit and income tax return are all required from the first financial year, irrespective of turnover. There is no dormancy relief that applies automatically.
Can our existing payroll vendor handle all of this? A payroll vendor processes payslips and statutory deductions. Registration, ROC compliance, audit coordination and income tax are separate scopes. Confirm what is inside your vendor’s scope and what is not, before assuming it is covered.
References
- Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 — threshold and contribution rates
- Employees’ State Insurance Act, 1948 — coverage threshold and wage ceiling
- Code on Social Security, 2020 — definition of wages
- Companies Act, 2013 — audit and annual filing requirements
- Income Tax Act, 1961 — Sections 192 and 194J
⚠️ Thresholds, wage ceilings and rates change through notification, and state-level obligations vary. Verify your specific position against the official portals or with your advisor before acting on any figure here.
Related Reading
- Payroll in India for a Foreign Company: PF, ESIC, PT, TDS
- Sending Money to Your India Subsidiary
- Who Actually Does What: A Vendor Map for Your India Subsidiary
Need help with this? TaxKitab handles Global Payroll for businesses across India and overseas. Talk to us.
This decision sits directly alongside the choice we cover in EOR vs Subsidiary in India — that post covers which route to take, this one covers what happens after you have taken it. The classification risk itself is set out in Contractor vs Employee in India, and the four payroll systems are explained in Payroll in India for a Foreign Company.Call or WhatsApp: +91 7448200422Email: info@taxkitab.comWebsite: taxkitab.comSee our Global Payroll** service or Contact us. For a complete guide to TDS, see our TDS & TCS Book 6 (₹249).**
